Ownership structure and risk-taking behaviour in conventional and Islamic

banks: Evidence for MENA countries

Samir Srairi
*
Faculty of Law, Economics and Management of Jendouba, University of Jendouba, Laboratoire de recherche en Economie Quantitative de Developpement
(LAREQUAD), 14 Avenue de Tunis, Ariana 2080, Tunisia
Abstract
This paper investigates the impact of ownership structure, measured by two dimensions: nature of owners and ownership concentration, on
bank risk, controlling for country and bank specic traits and other bank regulations. Particularly, it compares risk-taking behaviour of con-
ventional and Islamic banks in 10 MENA countries under three types of bank ownership (family-owned, company-owned and state-owned
banks) over the period 2005e2009. The result shows a negative association between ownership concentration and risk. We also nd that
different categories of shareholders have different risk attitudes. Family-owned banks have incentives to take less risk. State-owned banks
display higher risk and have signicantly greater proportions of non-performing loans than other banks. By comparing conventional and Islamic
banks, the empirical ndings show that private Islamic banks are as stable as private conventional banks. However, Islamic banks have a lower
exposure to credit risk than conventional banks.
Copyright 2013, Borsa
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Istanbul Anonim irketi. Production and hosting by Elsevier B.V. All rights reserved.
JEL classication: C26; G21; G32
Keywords: Commercial banks; Ownership structure; Bank risk-taking; Islamic banks; MENA countries
1. Introduction
Islamic banking has grown rapidly and it is considered as
one of the fastest growing segments of global nancial in-
dustry (Hasan & Dridi, 2010). According to Ernst and youngs
report 2011, Islamic nance assets around the world are ex-
pected to rise by 33% from their 2010 level to $1.1 trillion by
the end of 2012, boosted by the aftermath of the Arab spring
uprisings and dissatisfaction with conventional nance in the
world in the wake of the global debt crisis.
In the Middle East and North Africa (MENA) countries, the
growth of Islamic banking also indicates an impressive growth
trend. In 2010, the total assets were $416 billion and are ex-
pected to rise to $990 billion by 2015 as new countries (e.g.,
Tunisia, Egypt) open up to Islamic nance. The Islamic
banking sector in this region is expected to grow over the next
ve years at an annual rate of 20%, compared to less than 9%
for conventional banks. However, the sector remains frag-
mented (Islamic banks hold less than $13 billion in assets,
while conventional banks hold $38 billion in assets on
average) and a lack of benign legislative, regulatory and tax
environment among the organization of the Islamic conference
countries will continue to pose barriers for the sector by
increasing costs for Islamic nancial institutions.
Throughout the recent global nancial crisis, the Islamic
banking sector in the MENA region has demonstrated resil-
ience compared to conventional banks (Boumediene & Caby,
2009; Hasan & Dridi, 2010). According to Syed Ali (2011),
three factors helped Islamic banks to remain stable during the
* Tel.: 216 93150734.
E-mail address: Srairisamir3@gmail.com.
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http://dx.doi.org/10.1016/j.bir.2013.10.010
early phase of the crisis: (i) the nancing activities of Islamic
banks are more tied to real economic activities than their
conventional counterparts, (ii) Islamic banks avoided direct
exposure to exotic and toxic nancial derivative products and
(iii) Islamic banks have kept a large proportion of their assets
in liquid form compared with conventional banks.
During the last decade, most studies on Islamic banking
have focussed on issues related to the comparison between the
performance and instruments used in Islamic and conventional
banks (Olson & Zoubi, 2008; Srairi, 2009). Other studies have
discussed the regulatory and supervisory challenges of Islamic
banking. The analysis of the behaviour of Islamic banks in the
perspective of nancial stability becomes more important at
least for two reasons (Sole, 2007): (i) Islamic banks may
become systemically relevant as they grow and increasingly
interact with conventional banks that are systematically
important, (ii) the lack of Islamic instruments for hedging
results in the concentration risks in a small number of in-
stitutions. In addition, the implementation of Islamic in-
stitutions in many countries did not come from the government
but from individuals or small groups. Islamic banks tended to
become closely owned entities. According to Syed Ali (2006,
2007), this situation opens Islamic banks to risks emanating
from lack of sound corporate governance and contributes to
nancial distress. Despite the importance of these issues, a few
empirical papers (e.g. Cihak & Hesse, 2008; Gamaginta &
Rokhim, 2011; Hasan & Dridi, 2010; Sayd, Kabir, &
Gregory, in press) have analysed the question of risk and
stability in Islamic banks and whether and how these aspects
differ from conventional banks. None of these studies in-
vestigates the determinants of bank risk-taking or compares
the stability of the two types of banks under a specic
ownership structure. To ll this gap in the empirical literature
on the stability of Islamic banking, we attempt in the rst part
of this paper to carry out an empirical study of the effect of
ownership structure on the risk of commercial banks, con-
trolling for country and bank characteristics and other bank
regulations such as insurance deposit and shareholder rights.
In addition, our second objective is to analyse the link between
ownership structure and risk for both conventional and Islamic
banks. Specically, we try to answer two questions. First, we
investigate the determinants of risk-taking in the Middle East
and North Africa (MENA) banking industry during the
2005e2009 period, with special emphasis on both dimensions
of ownership structure, namely (nature of the owners and
ownership structure). Second, we compare and assess the risk-
taking behaviour of conventional and Islamic banks under
specic ownership proles concerning family-owned, com-
pany-owned and state-owned banks.
Our empirical analysis extends the existing literature in
three main directions. First, to our knowledge, this is the rst
study that analyses the risk-taking behaviour of conventional
and Islamic banks under three types of bank ownership. Sec-
ond, our model comprises two measures of risk, two measures
of ownership structure and several variables relative to country
and bank specic traits. Third, our sample comprises more
than 90% of MENA Islamic and conventional banks, which
makes it the most comprehensive database on commercial
banks in this region.
The remainder of the paper is organized as follows. Section
2 is a review of the literature related to the determinants of
bank risk-taking and the comparison of the level of stability
between conventional and Islamic banks. Section 3 describes
the data, variables and descriptive statistics. Section 4 presents
the methodology and the risk-taking model. Section 5 dis-
cusses the empirical results. Section 5 provides robustness
checks, and the paper ends with concluding remarks in Section
7.
2. Review of literature
Our aim in this section is to survey key studies related to
the factors inuencing bank risk taking and to the differences
in stability between conventional and Islamic banks.
2.1. Studies on determinants of bank risk taking
A review of the theoretical and empirical literature reveals
numerous attempts to analyse the determinants of bank risk
taking. According to agency theory, risk taking behaviour is
inuenced by conicts between managers and shareholders
(Jensen & Meckling, 1976). Theory predicts that managers are
risk-averse to protect their position and personal benets
whereas shareholders with a diversied portfolio have in-
centives to increase bank risk after collecting funds bond-
holders and depositors (Esty, 1998; Galai & Masulis, 1976).
However, the agency problem may be mitigated in rms with
concentrated ownership structure, as controlling shareholders
have strong incentives to monitor managers, and even replace
them in the case of poor performance (Franks, Mayer, &
Renneboog, 2001). Thus risk-taking is expected to be more
pronounced in rms with concentrated ownership than in rms
with dispersed ownership structure. Empirically, the relation-
ship between ownership concentration and risk is ambiguous.
Several studies (e.g. Haw, Ho, Hu, & Wu, 2010; Laeven &
Levine, 2009) showed that concentrated ownership control is
associated with greater risk. In contrast, Shehzad, De Haan,
and Scholtens (2010) nd that if ownership concentration in-
creases, the credit risk decreases. The type of shareholders
could also represent a source of risk in rms. Family com-
panies, for example, may also avoid risk taking because their
objective is to transfer a rm to the next generation (Anderson,
Mansi, & Reeb, 2003). However, other researchers (e.g.
Laeven, 1999; Anderson et al., 2003) found that family rms
are signicantly less diversied, and therefore riskier, than
non-family rms. In addition to the difference between family
and non-family owned rms, other aspects have been well
established in the literature concerning state-owned and
privately-owned rms. Iannotta, Nocera, and Sironi (2007),
compare performance and risk in a sample of 181 banks from
15 European countries. They nd that state-owned banks have
poorer loan quality and higher insolvency risk than private and
mutual banks while mutual banks have better loan quality and
lower asset risk than both private and public sector banks.
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Other studies compare foreign-owned banks with other types
of banks. Laeven (1999), investigated a panel of Asian banks
and found that foreign-owned banks take more risk than state-
owned, company-owned and family-owned banks. Among
other factors that are likely to inuence the risk taking be-
haviours of rms is the legal environment and bank regula-
tions. Several studies (e.g. Gonzalez, 2005; Laeven & Levine,
2009; La Porta, Florencio, Andrei, & Robert, 1998) found that
deposit insurance, activity restrictions, capital regulation and
shareholders protection affect the ability of bank owners to
take risk. For example, deposit insurance intensies the ability
and incentives of stockholders to increase risk (Keeley, 1990;
Merton, 1977). Strong investor protection is positively related
to risk taking (John, Litov, & yeung, 2008; Paligorava, 2010).
Capital regulations reduce the risk-taking incentives of owners
by forcing owners to place more of their personal wealth at
risk in a bank (Kim & Santomero, 1994; Laeven & Levine,
2009). Better protected creditors cause shareholders to incur
higher bankruptcy costs, which motivates the latter to avoid
insolvency by engaging in conservative investment policies
(Acharya, Amihud, & Litov, 2008). Nier and Baumann (2006),
among others, suggest that greater disclosure and transparency
strengthen market discipline and reduce risk taking of banks.
Finally, incentives to risk taking are also inuenced by the
characteristics of banks (Caprio, Laeven, & Levine, 2007;
Paligorova, 2010) and economic conditions (La Porta et al.,
1998; La Porta, Florencio, Andrei, & Robert, 2002).
2.2. Stability of conventional and Islamic banks
The recent global crisis has shed light again on the
importance of examining the relationship between Islamic
banking and nancial stability and whether Islamic banks
fared differently compared to conventional banks during the
crisis. In this section we present three recent studies that
attempt to address this question.
The study of Cihak and Hesse (2008) is considered the rst
study to analyse the role of Islamic banks in nancial stability.
Using Z-score as an indicator of insolvency risk, this paper
compares stability between conventional and Islamic banks in
18 countries over the period 1993e2004. This study has
yielded three main results: (i) small Islamic banks tend to be
more stable than small conventional banks, (ii) large conven-
tional banks tend to be nancially stronger than large Islamic
banks, and (iii) large Islamic banks are more risky than small
Islamic banks. Another study was conducted by Hasan and
Dridi (2010) to analyse and compare the impact of the
recent crisis on conventional and Islamic banks in terms of
protability, credit and asset growth and external ratings. The
sample comprises 120 banks in 8 countries during the
2007e2010 period. The results show that the initial impact of
the crisis in 2008 on the protability of Islamic banks was
limited. However, between 2008 and 2009, Islamic banks in
some countries fared relatively worse than conventional banks.
In terms of credit and asset growth, the authors found that
these indicators are at least twice higher in Islamic banks than
that in conventional banks during the crisis. The assessment of
Islamic banks risk by external rating agencies was generally
more favourable or similar to that of conventional banks.
Recently, Gamaginta and Rokhim (2011) analysed the stability
of 12 Islamic banks and 71 conventional banks in Indonesia
using the Z-score indicator during the period 2004e2009. The
empirical results indicate that the stability of Islamic banks is
generally lower than that of conventional banks except during
the crisis period of 2008e2009 where the two categories of
banks tended to have the same relative degree of stability.
They also found that small Islamic banks have the same level
of stability as small conventional banks.
In view of these studies, we notice that there are different
ndings concerning the stability of conventional and Islamic
banks especially in periods of crises. In this study, we attempt
to examine this question by analysing the inuence of
ownership structure on the stability of banks in MENA
countries.
3. Data and variables
3.1. Sample data
The original dataset includes 175 banks in MENA region.
We have applied an outlier rule to the main variables which
allows to drop the banks for which data on some variables are
either not available or contain extreme values for certain in-
dicators. In addition, we have chosen banks by applying some
selection criteria. First, to create a balanced panel, we only
kept banks with a minimum of ve consecutive years. Simi-
larly to Barry, Lepetit, and Tarazi (2011), we also delete banks
whose ownership shares of the main categories of shareholders
uctuate by more than 10% over the sample period. Thus, we
obtain banks with a stable ownership structure and conse-
quently we can accurately analyse the impact of different
ownership categories on the risk of banks. Finally, in order to
have a homogenous sample, we only retain commercial banks
and do not consider other types of banks (e.g., investment,
cooperative). The nal sample comprises 131 commercial
banks (93 conventional and 40 Islamic banks) operating in ten
MENA countries (Bahrain, Egypt, Jordan, Kuwait, Qatar,
Saudi Arabia, Sudan, Turkey, Yemen and the United Arab
Emirates) over the period 2005e2009 (see Table 1). The
annual nancial data and the ownership information of banks
are obtained from the Bankscope Database of Van Dijks
Company Bureau. The macroeconomic, nancial industry and
interest rate variables are sourced from International Financial
Statistics (IFS) and from annual reports published by central
banks in each MENA country.
3.2. Risk variables
Several different measures of asset risk and default risk
have been used in the literature. In this paper, we proxy banks
risk by using two measures: the ratio of non-performing loans
to total loans (NPLOAN) and the Z-score (Table 2) developed
by Boyd and Graham (1986, 1988). First, following Barth,
Caprio, and Levine (2004) and Gonzalez (2005), we use
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(NPLOAN) as a direct ex-post mean of credit risk. Since a
portion of non-performing loans will result in losses for the
bank, a high value for this ratio is associated with higher credit
risk (Delis & Kouretas, 2011). The second ratio, Z-score as
proxy for distance to default, is equal to the mean of return on
assets plus the capital asset ratio (equity capital/total assets)
divided by the standard deviation of asset returns computed
over a 3 moving window of 3 year. It is referred to as a
measure of bank stability since it represents the inverse of the
probability of insolvency of a bank (Laeven & Levine, 2009).
Thus, a higher value of Z-score is interpreted as a decrease in
risk and indicates that the bank is more stable. On the other
hand, the Z-score can be decomposed into two parts and
incorporate two types of risk (Lepetit, Nys, Rous, & Tarazi,
2008). The rst part is considered as a measure of bank
portfolio risk (ROA/SDROA) and the second is a measure of
leverage risk (capital asset ratio/SDROA). According to
Garcia-Marco and Roles-Fernandez (2008), Z-score considers
risk of failure to be essentially dependant on the interaction of
the income generating capacity, the potential size of return
shocks, and the level of capital reserves available to absorb
sudden shocks. For each measure of risk, we develop a specic
model.
It is interesting to note that there is an alternative measure
of bank risk based on market and not on accounting data (e.g.,
volatility of equity returns, market return). These measures
can identify the specic risk of each bank and the risk related
to the market; however, in this study we do not use the in-
dicators since a few banks in our sample are listed in the stock
exchange market.
3.3. Ownership variables
We measure ownership structure by two main dimensions:
ownership concentration and the nature of the owners (Table
2). The rst variable (CONC) is measured by the equity per-
centage participation by the largest shareholder of the bank. It
represents the sum of direct and indirect fraction of the banks
voting right held by the largest shareholder from the Bank-
scope database. Concerning the impact of ownership concen-
tration on risk taking, there is no consensus in the literature on
the sign of the relationship. Some studies nd a positive as-
sociation (Martinez & Ramirez, 2011; Saunders, Strock, &
Travlos, 1990), whereas others (Burkart, Gromb, & Panunzi,
1997; Iannotta et al., 2007) nd a negative impact on bank
risk. However, other researchers (Anderson & Fraser, 2000;
Table 1
Number of banks by country, type of bank and nature of owners.
Country Conventional banks Islamic banks Total
Company Family State Total Company Family State Total
Bahrain 4 1 2 7 9 2 1 12 19
Egypt 16 e 2 18 1 e e 1 19
Jordan 6 4 e 10 2 e e 2 12
Kuwait 3 1 1 5 4 e e 4 9
Qatar 2 1 3 6 1 e e 1 7
Saudi Arabia 8 e 1 9 2 e e 2 11
Sudan 7 2 4 13 5 1 e 6 19
Turkey 1 2 1 4 2 1 e 3 7
Yemen 3 e e 3 2 3 e 5 8
United A. Emirate 14 1 1 16 4 e e 4 20
Total 64 12 15 91 32 7 1 40 131
Table 2
Variables description.
Variables Denition and measure
Dependent variables
Credit-risk Ratio of non-performing loans to total loans
Z-score Indicator of insolvency risk, measured as the
mean of return on assets plus the capital asset
ratio (equity capital/total assets) divided by the
standard deviation of asset returns.
Independent variables
Ownership variables
Ownership
concentration
Equity percentage participation by the largest
shareholder of the bank.
Family Proportion of equity held by individual or family
investors.
Company Proportion of equity held by nancial and non-
nancial company.
State Proportion of equity detained by the
government.
Bank-specic variables
Size Natural logarithm of total assets.
Efciency Cost to income ratio.
Operating leverage Fixed assets to total assets.
ROA: return on asset Net income to total assets.
Diversication Non-interest income to total operating income.
Asset growth (Assett Assett-1)/Assett-1.
Loan growth (Loant Loant-1)/Loant-1.
Leverage ratio Equity to total assets.
Financial and Economic indicators
Level of economic
development
Per capita GDP.
Ination Annual average rate of ination
Deposit insurance
system
1: if there is an explicit system of insurance, 0: if
the implicit system is adopted.
Shareholders rights Minimum of percentage of ownership share that
entitles a shareholder to call for an extraordinary
shareholders meeting. 1 if the minimum
percentage is less than 10% and 0 otherwise.
Banking sector
development
Credit to private sector/GDP.
Bank concentration Assets of 3 largest banks to total assets of all
banks in the country.
Interest rate Three months interbank rate.
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Gorton & Rosen, 1995) conclude that ownership concentration
has a non-linear (U or inverse U) relationship with risk. Be-
sides the concentration variable, we choose three categories of
owners for which we can obtain information and whose nature,
behaviour and incentives to take risk we are able to identify.
These categories of owners in our study concern: individual/
family investors (FAMILY), nancial and non-nancial com-
pany (COMPANY), and publicly owned banks (STATE).
Thus, following Barry et al. (2011), we create three continuous
variables instead of dummy variables that report the propor-
tion of equity held by each category of owner for each bank in
our sample.
3.4. Control variables
Our two models include a number of bank characteristics
and country-level variables that are considered to affect either
the banks risk taking or the measurement of that risk (Table
2). At the bank level, following prior studies (Cihak &
Hesse, 2008) four variables are included for each model to
control for bank size, efciency, protability and operating
leverage. SIZE is measured as the natural logarithm of the
banks total assets. We use log transformation to allow for a
possible non-linear relation with risk. Large banks have the
ability to diversify risk across product lines and are more
skilled in risk management than small ones (Garcia-Marco &
Roles-Fernandez, 2008; Nguyen, 2011). We expect that bank
size and risk should be negatively related. Bank efciency
(EFEC) is proxied by cost to income ratio. Banks with lower
managerial efciency have higher risk. Using a data of 272
commercial banks operating in Latin American region,
Kasman and Carvallo (2013) nd that in the face of increased
risk and a lowered capital, banks have tended to improve cost-
efciency. ROA is the ratio of net income to total assets. The
impact of this variable on bank risk-taking is ambiguous (Delis
& Kouretas, 2011). However, in our study, we expect a posi-
tive association between risk and protability, because high
prot is generally accompanied by higher levels of risk. We
also control for the effect of operating leverage on bank risk by
using the ratio of xed assets to total assets (LEVOP). This
ratio is expected to be positively related to bank risk. Con-
trolling for these variables is important because there are many
differences in these indicators between Islamic and conven-
tional banks (Hasan & Dridi, 2010; Srairi, 2009, 2010). For
insolvency risk model, we add two others variables, business
model and asset growth. The rst variable (BUSIN) is repre-
sented by share of non-interest income in total operating in-
come. Some of studies (Abedifar, Tarazi, & Molyneux, 2013;
Lepetit, Nys, Rous, & Tarazi, 2008; Stiroh, 2004, 2006)
conclude that banks with high non-interest income share have
higher relative insolvency risk. However, other studies (e.g.,
Litan, 1985; Wall & Eisenbeis, 1984) provided suggestive
evidence that banks could reduce their riskiness by diversi-
fying into no bank activities. Asset growth (AGROW) is also
included in the model for insolvency risk to control for the
growth strategy of banks (Abedifar et al., 2013). Concerning
the credit risk model, we control for two others variables, loan
growth (LGROW) and leverage ratio (LEVER). We expect a
positive relationship between risk and loan growth, such that
the increase in credit may be reective of weakening screening
standards and therefore higher risk (Abedifar et al., 2013).
Leverage ratio is proxied by equity to total assets. According
to banking literature, total equity is considered to provide
buffer against loss; hence increasing this variable can reduce
credit risk (Rahman, Ibrahim, & Meera, 2009). In the case of
Chinese listed rms, Huang, Wu, and Liao (2013) nd a
positive relationship between risk and leverage ratio.
At the country level for the two models, we control for the
level of economic development, banking development,
competition in the banking system, protection of depositors
and shareholders rights. Gross domestic product (GDP) is a
measure of a countrys economic development, represented by
annual GDP per capita (in terms of US dollars). According to
La Porta et al. (2002), this variable also captures a countrys
Table 3
Descriptive statistics of dataset by type of banks (average values).
Variables Full sample Conventional banks Islamic banks Difference
in mean
Mean SD Mean SD Mean SD
Panel A: Risk measures
Z-score 24.41 21.59 21.7 19.82 20.82 23.66 2.54
Non-performing loan/total loans 7.44 10.65 9.93 11.05 6.46 10.65 3.46*
Panel B: Ownership variables
Concentration 51.88 29.87 48.96 31.21 44.19 30.15 4.82
Family 11.64 21.01 8.89 15.54 13.92 22.9 5.03*
Company 54.47 36.52 59.94 35.7 45.94 34.95 14.00*
State 14.09 27.74 17.74 28.93 0.53 3.44 17.21*
Panel C: Bank level control variables
Size (US $ million) 5833 8321 7240 10,370 4177 7927 30.63*
Cost to income 53.31 145.61 47.33 33.21 55.08 71.04 7.74***
ROA 3.28 8.01 1.32 2.03 5.11 13.03 3.78**
Fixed asset 1.6 1.69 1.16 0.77 2.3 2.5 1.14
Equity to assets 20.1 17.94 15.1 9.8 28.5 23.9 4.07*
Non-interest income to total operating income 22.48 15.57 22.7 11.89 23 20 1.36
All variables are in percentage, except where indicated. *, **, *** signicantly different from zero at 1%, 5% and 10% levels, respectively using a two-tailed tests.
119 S. Srairi / Borsa I
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general institutional quality. Poorer countries generally have
weaker governance structure. Countries with higher level of
GDP per capita have lower risk. Ination (INF) is measured by
the growth of the consumer price index and is expected to have
a positive effect on bank risk. Banking sector development is
proxied by credit to private sector divided by GDP (CPGDP).
This ratio is expected to inuence, like the GDP variable, bank
risk negatively. Bank concentration as proxy for competition
in the banking system (BCONC) is represented by the assets of
the three largest banks to the assets of all commercial banks in
the country concerned (Beck et al., 2006). According to
Sullivan and Spong (2007), banks in concentrated market with
higher franchise values have fewer incentives to take on
greater risk and thereby exploit the moral hazard features of
deposit insurance. We therefore expect a negative association
between market concentration and risk. Deposit insurance
(DEPINS) is a dummy variable indicating if the country has
explicit deposit insurance or not (yes 1; no 0). Deposit
insurance can limit the risk of bank runs. Many studies (e.g.,
Gropp & Vesala, 2001) nd that an explicit deposit insurance
system is associated with a decline in banks risk taking in-
centives. However, insured deposit can create a moral hazard
problem caused by limited liability of banks shareholders and
the reduced incentives of insured depositors to evaluate the
riskiness of the banks they provide with funds (Angkinand &
Wihlborg, 2007). Thus, bank managers may be encouraged to
take more risk in search for higher prots, because the in-
surance will cover a large part of the banks debts in case of
default. This relation between risk and deposit insurance is
more complicated and depends on several factors such as
market structure and competition (Keeley, 1990), capital reg-
ulations (Besanko & Kanatas, 1996), or bankruptcy costs
(Hwang, Shie, Wang, & Lin, 2009). We also control for
shareholders rights (SHRE). It is a measure of shareholders
legal protection of the country. The majority of studies use the
index of the statutory rights of shareholders proposed by La
Porta et al. (1998) which includes six components
1
and
ranges from zero to six. A high value of this index reects a
high protection of minority shareholder against managers or
dominant shareholder. Because of lack of information, we
proxy the shareholder rights in the study by only one
component of the indicator of La Porta et al. (1998). We use a
dummy variable concerning the minimum of percentage of
ownership share that entitles a shareholder to call for an
extraordinary shareholders meeting. This variable equals 1 if
the minimum percentage is less than 10% and 0 otherwise.
The banking theory suggests that effective legal protection of
shareholders serves as a substitute for the existence of a large
shareholder that monitors management (Magalhaes, Gutierrez,
& Tribo, 2008). Consequently, countries with high share-
holders protection increase bank risk-taking. Finally, we
include only in the credit risk model interest rate
2
(IRAT) as a
short-term rate measured as the annual average of the three
months interbank rate. Delis and Kouretas (2011) show that
lower interest rate increase bank risk-taking. They explain this
result by the fact that the reduction in interest rate may cause
reduced volatility and lower interest rate margins. This situa-
tion puts pressure on bank to search for yield in more risky
project.
3.5. Summary statistics
Table 3 presents sample descriptive statistics of risk mea-
sures, ownership variables and other bank-specic variables
for the overall sample and for conventional and Islamic banks.
It also reports differences in means for these variables between
conventional and Islamic banks.
3
In terms of insolvency risk
(Z-score), Table 3 (panel A) shows that Islamic banks are as
stable as conventional banks. On the contrary Cihak and Hesse
(2008) found that Islamic banks tend to be more stable than
conventional banks. However, these authors show that there
are differences between banks according to their size. Small
Islamic banks are more stable than small conventional banks,
while large Islamic banks are less stable than large conven-
tional banks. In terms of credit risk, Table 3 (panel A) shows
that Islamic banks have a lower level than conventional banks.
This result corroborates the nding in Abedifar et al. (2013)
and suggests that non-performing loans are lower in Islamic
banks than in conventional banks. Concerning the two
ownership variables, Table 3 (panel B) indicates that owner-
ship concentration (52%) in the MENA region appears to be
higher compared to other countries (e.g. 25% in USA
(Demsetz & Lehn, 1985)). There is no signicant difference
relative to this variable between conventional and Islamic
banks. In terms of the nature of owners, gures in Table 3
(panel B) provide sufcient evidence that most banks are
controlled by companies. By comparing conventional banks
vs. Islamic banks, we see that all categories of shareholders
expect family type, exhibit, on average, a signicantly higher
percentage of equity in conventional banks than in Islamic
banks. Statistics further show that the proportion of equity of
state category is very low (0.5%) in Islamic banks. Turning to
the descriptive statistics of other bank-specic variables, we
can then observe that conventional banks differ from Islamic
banks in terms of size, efciency and protability. Indeed,
Table 3 (panel C) shows that compared with conventional
1
These components are: the country allows shareholders to mail proxy
votes, shareholders are not required to deposit shares prior to the general
shareholders meeting, cumulative voting or proportional representation of
minorities on the board of directors is allowed, an oppressed minorities
mechanism exists, the minimum percentage of share capital that entitles a
shareholder to call for an extraordinary shareholders meeting is less than or
equal to 10% and shareholders have preemptive rights that can be waived only
by a shareholders meeting.
2
Note that related studies proxy interest rate using a number of others
measures such as the long-term rate and central bank rate. These variables are
missed in our database.
3
We perform t-test for difference in means of the various measures between
conventional and Islamic banks. Because the variables may not follow normal
distribution, we also use a non-parametric Wilcoxon rank sum test to examine
if the two samples are from population with the same distribution. The last test
shows a same results as t-test.
120 S. Srairi / Borsa I
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banks, Islamic banks tend to be signicantly smaller, more
protable and are less cost efcient. This result is in line with
several studies (Kabir Hassan, 2005; Kamaruddin, Safa, &
Mohd, 2008; Srairi, 2010). In terms of operating leverage,
we do not nd any signicant difference between conventional
and Islamic banks. To sum up, we can conclude that there are
many differences between conventional and Islamic banks
relative to risk, type of owners, size, efciency and
protability.
4. Methodology
To examine whether the risk-taking incentives of banks
vary systematically across different bank ownership structure,
we estimate the two following pooled regression models:
Model 1 for credit risk
NLOAN
it
a b1Ownership structure
it
b2Bank-level control1
it
b3country-level control1
jt
b4type of bank
jt
b5Year
t
b6Country
j
3
it
1
Model 2 for insolvency risk
Zscore
it
a b1Ownership structure
it
b2Bank-level control2
it
b3country-level control2
jt
b4type of bank
jt
b5Year
t
b6Country
j
3
it
2
In these models, we regress an ownership structure variable
on risk proxies in the presence of the control variables. Where
subscripts i denotes commercial banks (i 1,2.133), t time
period (t 2005,2006,.,2009), j country (10 countries in
MENA region), b1, b2, b3, b4, b5 and b6 are the parameters
to be estimated and 3
it
is the error term. The dependent vari-
able, risk, is proxied by the ratio of non-performing loans to
total loans (NLOAN) or Z-score. Ownership structure is
measured by two variables: ownership concentration (CONC)
and the nature of the owners (FAMILY, COMPANY, and
STATE). Bank-level control1
it
for credit risk model is a vector
representing is size (SIZE), efciency (EFF), protability
(ROA) operating leverage (OPELEV), loan growth (LGROW)
and leverage ratio (LEVER) at time t. Bank-level control2
it
for
insolvency risk model contains six variables: size, efciency,
protability, operating leverage, asset growth (AGROW) and
Diversication (DIVER). Country-level control includes for
two models economic development (GDP), ination (INF),
banking sector development (CPGDP), competition in the
banking system (MARP), deposit insurance (DEPINS) and
shareholders rights (SHRI). For credit risk model, we add
interest rate (IRAT). To analyse the differences in risk-taking
behaviour between the two types of banks, conventional and
Islamic banks, we add to the two models a dummy variable,
type of bank (TBANK), which takes a value of 1 for Islamic
banks and 0 otherwise. Year and country dummies variables
are also introduced in the two models to control for cross-
country and time variation. In order to check how different
is the ownership and risk-taking relationship for Islamic banks
versus conventional banks, we estimate a second model for
each measure of risk in which interactions between ownership
proxies (mix and concentration) and type of banks.
The methodology chosen to derive the results in this study
is based on panel data analysis. Since our models contain
many variables like GDP, ination, bank concentration, de-
posit insurance, shareholder protection right and interest rate
which are the same for all banks in a country, we adopt a
country random effects (Shehzad et al., 2010: Wooldridge,
2002). Further, other important variables like ownership con-
centration and nature of the owners do not vary much over
time. In consequence, the use of a xed effect model is not
feasible in this study.
4
5. Empirical results and analysis
Table 4 reports regression results for the two measures of
risk (credit risk and Z-score). Model A concerns regression
without interactions between explanatory variables and model
B with interactions between ownership proxies and type of
banks.
5.1. Ownership concentration and risk-taking
Concerning the impact of ownership concentration on risk-
taking behaviour; Table 1 shows a negative and signicant
association between ownership concentration and risk in all
two models. The negative effect suggests that banks with
concentrated ownership are taking lower risk in terms of credit
risk and insolvency risk than banks in diffuse ownership. This
result is in line with the ndings of Iannotta et al. (2007) and
Garcia-Marco and Roles-Fernandez (2008) and contrary to the
agency theory (Jensen & Meckling, 1976) and the results of
several studies (e.g., Saunders et al., 1990) which show that
large owners lessen the conicts of interests between man-
agers and shareholders and have greater incentives and power
to increase bank risk-taking than small shareholders. Our re-
sults are consistent with the argument of Burkart et al. (1997)
which states that as the monitoring effort exerted by a large
shareholder increases, managerial initiative to pursue new
investment opportunities decreases. This can be translated in
terms of less risk taking by managers in the case of concen-
trated ownership structure. In addition, some studies point out
(Caprio et al., 2007; Shehzad et al., 2010) that in countries
with low level of share-holder protections rights and super-
visory control (the case of most MENA countries), ownership
concentration reduces bank riskiness. Model B for the two
4
The Hausman test also suggests the use of the random effects over xed
effects models.
121 S. Srairi / Borsa I
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stanbul Review 13 (2013) 115e127
measures of risk shows no difference between conventional
and Islamic banks.
5.2. Ownership nature and bank risk
We now consider the role of ownership nature as it relates
to risk taking. Our results are consistent with the hypothesis
that different categories of shareholders have different risk
attitudes. As reported in models A and B, the coefcients
associated with the family variable are signicant. Family is
positively related to Z-score and negatively associated with the
credit risk measure (NPLOAN). This result indicates that
family-owned banks have relatively low risk, because they
hold a less diversied portfolio (Barry et al., 2011). In addi-
tion, in order to secure a banks long term survival, family
banks have incentives to take less risky projects (Anderson
et al., 2003). Moreover, in these banks, executive managers
are limited to family members. This causes alignment with the
risk preferences of managers and owners, leading to a decrease
in banks risk. However, other studies (e.g., Laeven, 1999;
Nguyen, 2011) nd that family-controlled banks are associ-
ated with signicantly higher risk. They explain the result by
the fact that family banks appear to be managed with the aim
of being handed over to the next generation. Accordingly, they
may be able to undertake high value-creating investments
compared to other banks. In addition family-owned banks are
more intensively engaged into insider lending than other banks
(state owned and foreign-owned banks). By comparing con-
ventional and Islamic banks, we nd signicant differences
between the two types of banks only in terms of credit risk
(model B). Family conventional banks tend to have relatively
higher levels of credit risk compared to family Islamic banks.
We can explain this result by the nature of the activities of
Islamic banks which appear to reduce risk by following a
prot and loss sharing paradigm (Abedifar et al., 2013).
Moreover, family Islamic banks have a small size and are
more likely to be relatively new, conservative in their opera-
tions and attract clients for religious reasons that are less risky.
On the contrary, the empirical results show that the stability of
family-owned Islamic banks is not signicantly different from
Table 4
Estimation results of base model.
Explanatory variables Credit risk Z-score
Model A Model B Model A Model B
Coef. t-statist. Coef. t-statist. Coef. t-statist. Coef. t-statist.
Ownership variables
Concentration 0.198 (2.81)* 0.462 (2.51)** 0.531 (3.15)* 0.721 (2.67)**
Family 0.431 (2.25)* 0.684 (2.67)** 0.762 (3.42)* 0.641 (3.15)**
Company 0.145 1.32 0.482 1.97 0.12 1.41 0.612 1.59
State 0.38 (2.35)* 0.468 (2.52)** 0.075 1.12 0.161 1.11
Bank-characteristics
Size 0.632 (2.82)* 0.895 (3.05)* 1.056 (3.25)* 0.986 (3.02)*
Efciency 0.007 0.46 0.096 1.2 0.278 (2.31)* 0.432 (2.56)**
Protability 0.625 (3.07)* 0.593 (2.96)* 0.053 (1.20) 0.143 (1.67)
Operating leverage 0.157 0.93 0.098 1.24 1.678 (2.51)** 0.946 (2.62)**
Loan growth 0.162 0.956 0.231 1.12
Leverage ratio 0.314 (2.41)** 0.623 (1.99)**
Diversication 0.412 (2.14)** 0.314 (2.43)**
Asset growth 0.063 0.912 0.123 1.236
Financial and economic variables
Per capita GDP 0.124 (3.56)* 0.326 (3.28)* 0.072 0.98 0.134 1.23
Ination 0.089 (1.78)* 0.142 (1.81) 0.231 1.25 0.214 0.94
Insurance deposit 0.643 (1.89) 0.713 (1.26) 0.094 0.87 0.123 1.46
Shareholders rights 0.568 (2.97)* 0.469 (2.82)* 0.462 (3.125)* 0.765 (2.98)*
Banking sector development 0.296 (3.14)* 0.711 (3.14)* 0.964 (2.91)* 0.862 (3.04)*
Bank concentration 0.146 (1.23) 0.073 (0.91) 0.821 (2.98)* 0.765 (2.56)*
Interest rate 0.231 (1.41) 0.093 (1.05)
Type of banks 0.231 (2.56)** 0.422 (2.15)*** 0.013 1.05 0.012 1.32
Year dummy Yes Yes Yes Yes
Country dummy Yes Yes Yes Yes
Type of banks concentration 0.231 1.246 0.412 1.65
Type of banks family 0.466 (2.56)** 0.124 1.04
Type of banks company 0.126 (2.01)*** 0.04 0.98
Type of banks state 0.041 0.87 (2.51)** 0.31 1.12
Constant 0.956 (2.06)** 1.235 (1.98)** 0.589 0.851 (2.21)**
Number of observation 655 655 655 655
R-squared 0.342 0.456 0.395 0.412
Walid chi-squared 72.23* 74.56* 56.12* 53.2*
Notes: t-statistics are between parentheses. *, ** and *** indicate statistical signicance at 1%, 5% and 10%, respectively. The year dummies and country dummies
are included in the regressions but their coefcients are not reported in the table to conserve space.
122 S. Srairi / Borsa I
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stanbul Review 13 (2013) 115e127
that of family-owned conventional banks. These results denote
that family conventional banks tend to have a higher asset risk
but not necessarily a higher default probability.
As regards the effect of state ownership on banks risk
taking, we nd, in the case of credit risk, that the coefcient of
the state variable is signicantly positive for credit risk model.
Thus, state-owned banks have greater proportions of non-
performing loans than other banks. Several studies (e.g.,
Berger, Clarke, Cull, Klapper, & Udell, 2005; Cornett, Guo,
Khaksari, & Tehranian, 2010; Iannotta, Nocera, & Sironi,
2007) have found that the relationship between government
participation in banking ownership and risk is positive and
signicant. According to these studies, state-owned banks
have poorer loan quality and higher default risk than privately
owned banks. This nding is consistent with the view that
government-owned banks are run by political bureaucrats and
their decisions are dictated by political interests (Iannotta
et al., 2007). However, Cornett et al. (2010) in their study
relative to 16 Asian countries nd that state-owned banks
closed the gap with privately-owned banks in terms of cash
ow return, core capital and non-performing loans in the post
crises period of 2001e2004. The authors explain this nding
by the increasing globalization of nancial services, compe-
tition which creates a pressure to improve banking policy that
disciplines inefcient regulators and enhances the perfor-
mance of state-owned banks.
As far as the comparison between conventional and Islamic
banks is concerned, Table 4 (model B) shows that the state
variable is insignicant with Z-score, but is slowly signicant
with the non-performing loans ratio only. It appears that the
state Islamic banks have a similar insolvency risk as state
conventional banks. However, Islamic banks have a lower
exposure to credit risk than conventional banks.
Regarding the inuence of company on banks risk, we do
not nd in the two models (A and B) any signicant coef-
cient associated with the variable company when the depen-
dent variables are credit risk or Z-score. This supports the
ndings of Abedifar et al. (2013) which found similarities in
the credit and solvency risk features of Islamic and conven-
tional banks. Overall, we can say that private Islamic banks are
as stable as private conventional banks.
5.3. Control variables
The coefcients on other bank characteristics offer some
important insights. In line with several studies (e.g., John
et al., 2008; Paligorova, 2010; Sullivan & Spong, 2007),
bank size in all models has a negative effect on risk, which
conrms the theory that large banks are able to diversify risk
because they have more opportunities to pursue a broader
range of loans, investments and other activities. In the two
models for Z-score, the coefcient of the cost to income ratio
is negative, implying that banks with lower managerial ef-
ciency are exposed to more bank risk (Shehzad et al., 2010).
Return on asset is insignicantly associated with Z-score, but
displays a strong negative association with credit risk. Con-
trary to expectations, the coefcients of operating leverage
variable (LEVOP) in the models for Z-score are signicant and
have a negative effect on bank risk. However, Mandelker and
Rhee (1984) among others have argued that operating leverage
has the same impact as nancial leverage in increasing bank
risk. A similar positive effect is found in the models for credit
risk but the variable is not signicant. Using data envelopment
analysis for banks operating in Turkey, Gunay (2012) shows
that efciency scores are much lower when non-performing
loans are incorporated as an undesirable output in the model.
Similarly to the study of Abedifar et al. (2013), we do not nd
any relationship between loan growth and credit risk, and asset
growth with insolvency risk. In Table 4, the leverage ratio is
negative and signicant for two credit risk model. This result
which is consistent with previous study (Borio & Zhu, 2008;
Delis & Kouretas, 2011) means that higher equity capital
implies more prudent bank behaviour. Table 4 also shows, for
insolvency risk model, a positive relationship between Z-score
and diversication proxy. This nding support the argument
that diversication into non-banking activities decreases the
riskiness of bank.
The results on country-level variables are also interesting.
As expected, higher levels of GDP per capita reduce bank risk
taking. This result conrms the view that banks from faster-
growing countries have a lower portion of bad loans and are
less risky (Angkinand & Wihlborg, 2007; Laeven & Levine,
2009). For all models and for the two measures of risk, the
coefcient of the proxy of banking sector development is
signicantly and negatively related to bank risk. This suggests
that countries with higher level of banking sector development
have lower risk. Shareholders right are found to be positive
related to Z-score and negatively associated to credit risk.
Therefore, the higher the efciency of the legal system that
protects shareholders, the lower the risk taken by banks.
Several studies (e.g., Angkinand & Wihlborg, 2007;
Magalhaes et al., 2008) supported these ndings. We also
identied a positive and signicant relationship between the
bank concentration variable and Z-score. This supports the
argument of Sullivan and Spong (2007) that market concen-
tration decreases bank risk by exploiting the moral hazard
features of deposit insurance. Finally, contrary to our expec-
tation, we nd no signicant relationship between interest rate
and credit risk.
6. Robustness checks
6.1. Two-stage least squares
The reported coefcient estimates in Table 4 may be biased
as risk and ownership might be jointly determined by unob-
servable factors which violate the consistency of the OLS
estimator. Some studies (e.g., Demsetz & Lehn, 1985; Gugler
& Weigland, 2003) suggest that ownership is endogenous
because it is inuenced by the banks level performance and
risk. Then, we potentially have a problem in our regression
with the two ownership variables. To address this endogeneity
problem, we use an instrumental variable that is correlated
with ownership structure and uncorrelated with risk-taking. In
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this study, we consider two instrumental variables for each
ownership variable (CONC, FAMILY, COMPANY and
STATE). The rst instrument is the bank age. According to
Nguyen (2011), the ownership composition changes as the
bank evolves through its life cycle. Many studies (e.g. Black &
Gilson, 1998; Claessens, Djankov, & Lang, 2000) suggest that
as banks get older, they grow in size and require external
funding, as they become more widely held. Following Nguyen
(2011) and John et al. (2008), the second instrument represents
the average ownership of rms in the same industry group and
country. For ownership concentration (CONC), we use the
average ownership concentration of others banks in the same
industry. For the type of owners, we use the percentage of
family or company or state banks among other banks in the
same industry. After the choice of the instrument variables, the
equations (1) and (2) are estimated using the two-stage-least
squares (2SLS) regression. To control for endogeneity, we
perform a Hausman test against the corresponding OLS esti-
mates to determine whether the two ownership variables are
endogenous. Because we have two exogenous instruments for
each endogenous ownership variable, we use the Sargan test
and the Basmann test (test of overidentifying restrictions) to
ensure that our instrumental variables are exogenous and not
redundant.
Table 5 presents the ndings estimated by using 2SLS
regression in which risk is proxied by Z-score and the ratio of
non-performing loans to total loans. The Hausman test of
endogeneity conrms that instruments variables estimate of
the coefcient on ownership structure are larger than the OSL,
which suggests that OSL may generate biased estimates and in
consequence underestimates the true effect of ownership on
risk-taking. In addition, the over identication tests of
excluded instruments (Sargan and Basmann tests) do not reject
the hypothesis that the excluded instruments are uncorrelated
with the error term and support the assumption that the in-
struments are valid. The results are qualitatively similar to our
previous ndings.
6.2. Others sensitive tests
We also perform several tests to examine the robustness of
our major ndings using different types of analysis. First,
following several studies (Barry et al., 2011; Berger, Hasan, &
Zhou, 2009), we substitute continuous variables relative to the
nature of the owners with dummy variables to analyse whether
banks risk-taking behaviour depends on the nature of the
main type of shareholders. Hence, we add in the equations (1)
and (2) three dummy variables which take the value of 1 when
ownership is greater than 50% of total equity and 0 if other-
wise. Our results, not reported, show that banks which are
majority owned by families or companies exhibit a lower risk
level compared to state owned banks. We also nd a difference
between conventional and Islamic banks only in terms of
credit risk particularly for family-owned banks. In terms of
insolvency risk, no difference was found between conventional
and Islamic banks concerning all categories of banks. Second,
we use the alternative measure of ownership concentration
dened as the total shares of the largest three shareholders
instead of the percentage share of the largest shareholder. The
results regarding our ownership variables are unchanged.
Third, we examine whether the effect of type of owners on risk
taking is related to the degree of ownership concentration. The
analysis is performed by adding equations (1) and (2) with
interactions variables involving the different categories of
owners and ownership concentration. The results, not reported,
show that the degree of ownership concentration does not
inuence the relationship between ownership structure and
bank risk for both conventional and Islamic banks. Finally, we
also examine whether our results are sensitive to the method
used (2SLS) concerning the issue of endogeneity problem.
Hence, we re-estimate the two equations using GMM method.
Overall, the results not reported are qualitatively similar to our
previous ndings.
7. Conclusion
In view of the rapid growth of Islamic banks around the
world and their resilience during the recent global crisis,
Table 5
Regression results of bank risk measures on ownership structure variables with
2SLS.
Explanatory variables Credit risk Z-score
Coef. t-statist. Coef. t-statist.
Ownership variables
Concentration 0.267 (2.76)* 0.658 (3.01)*
Family 0.564 (2.38)** 0.964 (3.51)*
Company 0.165 0.91 0.047 1.12
State 0.375 (2.27)** 0.069 1.23
Bank-characteristics
Size 1.467 (7.62)* 0.848 (2.49)*
Efciency 0.006 0.42 0.037 (2.15)**
Protability 0.36 (3.68)* 0.054 (0.30)
Operating leverage 0.238 0.91 0.973 (2.10)**
Loan growth 0.125 1.23
Leverage ratio 0.412 (2.22)**
Diversication 0.753 (2.98)*
Asset growth 0.265 1.76
Financial and economic variables
Per capita GDP 0.008 (3.22)* 0.003 0.49
Ination 0.12 (1.24) 0.09 0.79
Insurance deposit 0.128 (0.85) 0.022 (0.98)
Shareholders rights 0.432 (3.67)* 0.771 (3.09)*
Banking sector development 0.063 (3.12)* 0.1 (2.69)*
Bank concentration 0.038 0.23 0.449 (3.97)*
Interest rate 0.056 (0.45)
Type of banks 0.621 (2.982)* 0.412 1.169
Year dummy Yes Yes
Country dummy Yes Yes
Number of observation 655 655
F-value 4.45*
R
2
0.372
Sargan test 0.461 0.856
Basmann test 0.449 1.23
Hausman test of endogeneity 19.143*
Notes: t-statistics are between parentheses. *, ** and *** indicate statistical
signicance at 1%, 5% and 10%, respectively. The year dummies and country
dummies are included in the regressions but their coefcients are not reported
in the table to conserve space.
124 S. Srairi / Borsa I
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stanbul Review 13 (2013) 115e127
several issues are highlighted with regards to the performance
of these banks and their inuence on nancial and economic
stability. This paper presents empirical evidence on the dif-
ferences in risk-taking behaviour between conventional and
Islamic banks in MENA countries. We examine the effect of
ownership concentration and the nature of owners on the two
indicators of bank riskiness, namely Z-score and the ratio of
non-performing loans to total loans for a sample of 131 banks.
In general, we nd that changes in ownership structure are
signicant in explaining risk differences between banks.
Indeed, the results highlight the fact that banks with concen-
trated ownership have lower insolvency risk and lower asset
risk. We nd almost no differences related to ownership
concentration when we analyse conventional banks and Is-
lamic banks separately. Our ndings also reveal that the nature
of owners is relevant to explaining risk-taking especially with
credit risk measure. More precisely, family owned banks
appear to assume lower risks. For this type of shareholders, the
results suggest that family Islamic banks have a lower level of
credit risk compared to conventional banks. No differences
were found between the two types of banks in terms of Z-
score. For state-controlled banks, the results are in line with
the view that government banks had greater credit risk than
privately owned banks. In addition, for this indicator we nd
that state Islamic banks tend to be more stable than state
conventional banks. In the case of banks owned by nancial
and non-nancial companies, we nd no differences in asset
risk and default risk between conventional and Islamic banks.
Market forces seem to align the risk-taking behaviour for Is-
lamic banks. Overall, despite the fact that Islamic banks face
extra operational risks and concerns because of the complexity
of the Islamic modes of nance and limitations in their in-
vestment activities (Abedifar et al.., 2013; Cihak & Hesse,
2008), we can conclude that Islamic banks are as stable as
conventional banks. However, Islamic banks have a lower
exposure to credit risk than conventional banks. This nding
can be justied by the argument that Islamic banks are more
likely asset-based and followed the form of PLS principles in
their transactions. In this context, it is important to note that
PLS nancing shifts the direct credit risk from banks to the
investment depositors but it also increases the overall degree
of risk on the asset side of banks balance sheets (Cihak &
Hesse, 2008).
These results have some relevant policy implications. First,
as suggested by Abedifar et al. (2013), it is not necessary to
develop separate regulatory and supervisory systems for each
type of banks as conventional and Islamic banks presented
similarities in terms of credit and insolvency risks. Islamic
banks should be treated similarly to their conventional coun-
terparts. However, as Islamic banks present particularly risks
arising from the specic features of Islamic contracts (Iqbal &
Lewellyn, 2002), nancial reforms in this region related to the
convergence and harmonization of regulations and products
are needed to facilitate an efcient and sustainable growth of
this sector. Second, the results show that size is relevant to
explain bank risk. Therefore, Islamic banks have to draw
suitable strategies to establish large entities in order to
increase their performance and compete with existing banks.
Finally, in the MENA region, an important number of banks
are owned by companies. In this case, our results indicate that
ownership structure is not a determinant factor in explaining
risk differences between conventional and Islamic banks. In
consequence, we estimated that the stability of banks espe-
cially in countries with two nancial systems (conventional
and Islamic) is dependent on many other variables such as: the
nancial and economic environment in the country, the level
of market share of Islamic banks, the legal and regulatory
framework, and the level of utilization of loss and prot
sharing modes by Islamic banks. Therefore, the issue of
whether Islamic banks are more or less stable compared to
conventional banks warrants further investigation in the future
by introducing these variables.
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